SBI Ecowrap in a report titled ‘Timing Future Reforms in India’ has said the country may postpone for a short while the implementation of global risk norms Basel III as the banking sector is already under stress due to demonetization and the GST roll-out.
According to the Reserve Bank direction, the Basel III capital regulation has been implemented since April 1, 2013, in India in phases, and it will be fully adopted as on March 31, 2019. The SBI report calls for extending this deadline.
An extended timeline to meet capital needs under the norms would provide the necessary breather to banks to lend more while they grapple with several issues, it said.
“We believe the Indian banking sector needs some time to assimilate the impact of the past three structural changes (demonetization, GST implementation, and RERA) before facing the new ones,” said the SBI report.
“Even as we acknowledge the positive impact of such reforms, we are convinced that perhaps the Indian banking sector deserves a small interregnum so as to meaningfully concentrate on issues related to financial inclusion, asset quality, and credit growth,” it said.
Meanwhile, a review of Reserve Bank of India (RBI) data obtained through right-to-information requests shows banks’ total stressed loans—including non-performing and restructured or rolled over loans—rose 4.5 percent in the six months to end–June, according to a report. In the previous six months, they had risen 5.8 percent.
The banks’ distressed loans hit a record 9.5 trillion rupees ($145.56 billion) at the end of June.
Fitch Ratings estimates that Indian banks may need an additional capital of $65 billion by March 2019 to meet Basel III global banking rules. Moody’s expects the top 11 state lenders alone will need nearly $15 billion. The government has just $3 billion left in its budget for bank recapitalization.
“We think capitalization is the biggest challenge for the banks at the moment, given that earnings will remain subdued and will not support any capital generation,” said Moody’s Anbarasu.